Hud `Sting` To Root Out Lending Bias

The U.S. Department of Housing and Urban Development plans to begin using undercover ``sting`` operations to investigate banks for racial discrimination in mortgage lending.

The department will use its authority under fair-housing legislation to send ``matched pairs`` of minority and white testers posing as mortgage applicants into banks to uncover loan discrimination. The testers will have closely matched characteristics, such as income, credit history and bank balances.

The program, announced in the Federal Register last week, involves a technique long used to investigate discrimination by landlords and real estate agents.

The Federal Register notice called for applications from contractors to conduct the tests in three cities. HUD officials said the department would start with a pilot program in Philadelphia, St. Louis and a third city, which will be kept secret until the pilot is complete.

The undercover operation follows the release last fall of a Federal Reserve study of all U.S. mortgage applications in 1990 showing blacks and Hispanics were far more likely to have their applications turned down than whites, even when their incomes were similar. Affluent blacks were rejected at essentially the same rate as poor whites, the study found.

The U.S. Comptroller of the Currency, which supervises about a third of all banks, has launched its own investigation of 266 banks with particularly large disparities between the rejection rates of minority and white applicants.

Banking regulators, however, have joined the industry in rejecting the use of undercover testers to check for discrimination. Federal Reserve Board members cited the use of deception in undercover investigations and the complexity of loan decisions as reasons for turning down a testing proposal last fall.

``It`s not like checking for broker discriminaton, where you come in, ask if they have any apartments and they say no,`` said Virginia Stafford, a spokeswoman for the American Bankers Association. ``There are a tremendous number of variables in the mortgage lending process.``

A New York firm reported last fall that it had found in its own undercover tests of bank branches that minority borrowers suffered from subtle discrimination. Minority borrowers had to wait longer to get their applications and received less information about loans from banks tested, the firm said. The private testers did not actually apply for loans because the procedure would have violated banking laws.